When Wall Street Gets This Bearish, Some Say it’s Time to Get Bullish

Experts are more negative on stocks than they have been since the mid-1990s. That's exactly why now might be the perfect time to buy.

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Savita Subramanian says she’s thinking stocks for her six-month-old’s college fund.

Lots of people wrestle with how to invest for the future, but Subramanian thinks about these things more than the average person because she heads equities and quant strategy for Bank of America Merrill Lynch. And at the moment, some of the barometers she keeps an eye on are pointing her toward stocks — despite the dreary June jobs report, the upset in Europe, and the fiscal woes here.

In fact, Subramanian’s counter-intuitive reasoning may surprise you: She says her clearest buy signal comes from the strategists on Wall Street who tell clients how much to invest — and who are now as bearish (i.e. pessimistic) about stocks as they’ve been in 15 years.

So why exactly did  Subramanian tell TIME.com that she is thinking about putting her kid’s college fund in stocks? She says this pessimism is a counter-indicator — a sign that the market has almost nowhere to go but up. In fact, it’s the extreme nature of the pessimism — the nearly universal consensus — that makes her so optimistic. “Normally, there is is a fair amount of disagreement” among sell side strategists, says Subramanian. But over the past year, the experts have become more and more in sync with one another, telling clients to keep just 50% of their investments in stocks, down from the more typical 60% to 65%.

Sell-side strategists on Wall Street weren’t this negative about stocks even during the worst of the financial crisis in 2008, or during the bursting  of the high tech bubble in the early aughts. Subramanian surmises that the relentless replay of the same old bad news has beaten down everyone. As a result, the BAML Sell Side Consensus Indicator slipped below 50 in June, the lowest since 1997. “Nothing really new has emerged over the last year. It’s the same stuff that keeps bubbling up over and over again,” says Subramanian as she ticks off the all-too-familiar list of woes — the European banking crisis, the debt problems here, high unemployment, and a weak recovery.

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Historically, she says, when the Sell Side Consensus Indicator has turned super bearish, the S&P500 has risen 87% of the time within the next 12 months. Market strategists tend to be nervous nellies at just the wrong moment: Throughout the bull market of the 1980s and 1990s, for example, strategists consistently recommended under-weighting stocks, one of the best times to invest ever. That doesn’t mean that there won’t be volatility from month to month, says Subramanian. But she feels the overall trend is more likely to be up.

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Subramanian isn’t the only investment pro taking this contrarian stance. Howard Lindzon, founder of StockTwits, a financial Twitter feed, says he loves “all the negativity.” The beaten-down stock market makes for a “stockpicker’s dream,” he says. Similarly, Ralph Acampora, veteran technical analyst, said last week on Twitter: “This rally has much more potential.” The market may look shaky now, but for the year, the S&P 500 is still up 5% and the Dow Jones Industrial Average is still 2% in the plus column. More than half of the 30 Dow components look like good investments, he tweeted.

Many contrarians see the current average price-earnings (p/e) ratio of S&P 500 stocks, now at 14 times earnings, as a buy signal. That’s about the level it stood in 1990; during the dot-com boom and the peak of the real estate bubble the p/e tripled at some points. Usually, though, the p/e peaks in the low 20’s.

The problem is that broad measures like the market p/e won’t tell you whether a stock price is likely to rise in the next month or two — or even the next year, says Subramanian. But if you look out 10 years, she says, the p/e explains about 90% of performance. So contrarians need to have a very long-term outlook and not get easily rattled by the day-to-day bumps of the markets. If you’re saving for far off in the future, then you might just be able to kick back and not worry; but if, say, you’re heading into retirement within the next couple of year, the market unfortunately remains as treacherous as ever.